Getting ready for retirement
By Jenny C. McCune • Bankrate.com

The good news about saving for retirement when you're a small-business owner? You call the shots. The bad news? You call the shots.

"When you're self-employed you have more choices about when you retire and how to save for retirement," says Sean Cherry, a financial adviser with Financial Asset Management Corp. in West Palm Beach, Fla.

That means no mandatory retirement age unless you set one. And you choose your retirement saving vehicle rather than using the 401(k) plan selected by an employer. While such flexibility is nice, it also carries a lot of responsibility. It's up to you to design the right retirement plan for you and your employees.

True, many small-business owners aren't in the market for retirement. They like what they do, live for their business and can't imagine ever leaving it. Owners who do contemplate eventual retirement often face conflicting financial goals of keeping their companies thriving while saving for the day they can walk away.

Ernie Doud, managing partner with DoudHausnerVistar, a family business consultant in Glendale, Calif., has some encouraging words for future small-business retirees.

"Running your own business and taking early retirement are not necessarily mutually exclusive goals," says Doud.

Business success guides retirement plan
The best way to come up with a retirement saving strategy is to analyze your business. Does it have sufficient cash flow that you have extra money to set aside for retirement? If not, you're going to have to wait.

Ask your accountant for advice, says Michael Eisenberg, founder of West Los Angeles-based Michael Eisenberg Accountancy Corporation and a CPA and personal financial specialist. Eisenberg also recommends incorporating your business so that you can take advantage of corporate retirement plans like IRAs.

"It's all enabled by your business," Doud sums up. "If you have a business that is generating sufficient cash flow, you can set up a retirement saving plans. If not, then you can't."

Rob Gelphman, who owns Gelphman Associates public relations in California, believes that business owners can't even think about retirement until they get their companies established.

"You need to be seven to 10 years into the business," Gelphman says. "You will not have the time to think about it before then, nor will you have the money."

Savings choices
When you are able to start putting away retirement money, your next big decision is just how to save.

One error that many small-business owners make is to put all their retirement nest eggs into one basket. The basket then turns out to be their business.

Using the sale of your business as your exclusive device for retirement savings is foolhardy, says Cherry. "No one company is fail safe," he says. "You cannot depend on your company. You don't know where it will be when you want to retire."

Instead of depending on the sale of your business to fund your retirement, examine your options. Internal Revenue Service Publication 560, Retirement Plans for Small Business, offers an overview of plan types. Among the options discussed are Simplified Employee Pensions (SEPs), Savings Incentive Match Plan for Employees (SIMPLE) plans, Keoghs and individual retirement accounts.

Fitting your company's needs
When choosing a retirement plan, the small-business owner must examine:

• Best fit for yourself, your business and your employees
• Maximum amount of yearly investment
• Setup difficulty
• Administrative complexity
• Administration costs
• Tax ramifications

As for taxes, the right retirement can ensure glitter in your golden years, as well as help "smooth" your tax obligations, says CPA Eisenberg.

For example, putting savings in a SEP IRA can reduce the taxes you pay today. On the other hand, a Roth IRA lets you pay taxes upfront so that you can withdraw funds tax-free upon your retirement. So consider a retirement fund not just for what it can do for your retirement, but what it can do to help your current tax situation, Eisenberg says.

And last year's tax law changes now offer small-business owners more retirement choices. "The beauty of the new tax law is it gives the small-business person a lot of flexibility," Eisenberg says.

New self-employed 401(k)
Such flexibility is highlighted in the Solo 401(k) plan, created by 2001 tax legislation. As the name implies, Solo 401(k) plans are geared toward self-employed individuals who have no employees or who only work with their spouse.

What's nice about the Solo 401(k) plan is that it allows the self-employed worker to contribute a percentage of income and adds an amount parallel to the voluntary contribution, called an "elective deferral," that workers who are employed can put into conventional 401(k) plans. The only limit: The total of both contributions cannot exceed $40,000. Plus, the mechanics of setting up a Solo 401(k) plan are also a lot less cumbersome than other small business plans and the administrative costs are relatively low.

When considering a Solo 401(k) or any retirement plan, it's also important for a small-business owner to get his or her overall financial house in order.

"Investments are just one tool of the financial planning process," Cherry says. He advises clients to also make sure their wills are in order, to sign up for long-term care medical insurance, buy life insurance, and to make the other preparations that are needed for a good retirement.

"Many small-business owners just focus on the investment return and retirement, which is a mistake," the Florida financial adviser says.

Jenny C. McCune is a contributing editor based in Montana.

-- Updated: Sept. 27, 2005